Image Source: Pixabay

It is safe to say that investors have a strong demand for bonds in their portfolios despite the ongoing uncertainty on future inflation trends, diverging central bank policies, global trade tensions and their impact on companies and individuals around the world. Nevertheless, these headwinds leave a lot of investors undecided about which kind of bonds and which maturities they should invest in. These investors may strive for an active managed bond fund, where a professional fund manager makes those decisions for them.

While most of the other bond investors may want to benefit from the general developments in the bond markets, hence investing in plain vanilla bond indices, some investors may want to invest in specific segments of the global bond markets (issuers, ratings, currencies, maturity, etc.) and may therefore prefer passive bond ETFs, as some of these products do offer precise access to exactly those segments of the bond markets.

While bond ETFs have become a staple for investors, their relative market share compared to mutual funds is significantly lower than the market share of equity ETFs compared to their mutual fund peers. Obviously, this lack of market share was in the past caused by a lack of available investment options that suited the needs of investors. This has changed over the last couple of years, as the ETF promoters around the world have launched new and innovative products. This is especially true when it comes to actively managed bond ETFs, which are now competing with their mutual fund peers for the investor money. That said, the choice for actively managed bond ETFs is still limited, meaning that investors may more often than not still end up buying a mutual fund because the strategy they want is not available in the ETF wrapper. As the number of ETF promoters offering bond ETFs is increasing globally, the number of missing strategies is decreasing. This may mean that (active and passive) bond ETFs may start to grow faster than their mutual fund peers and may therefore play catch-up with regard to their market share with equity products.

To answer the question in the headline, I do believe that bond ETFs are on the rise and will become a major growth driver for the ETF industry globally. The reasons for this are the suitability of low cost (active and passive) bond ETFs for all kinds of investors in addition to the transparency and liquidity of these products.

More By This Author: